The dollar, Russia and China: Three reasons Greece exiting Eurozone will worry US

Which are the failed states of the world? Forget Pakistan. That’s not going to happen with Pakistan having all-weather friends like China and Saudi Arabia and a whimsical but damn effective “strategic partner” like the United States which glorifies India’s neighbor as a “Major Non-NATO Ally”. Forget North Korea. With China backing it, there is little chance of this East Asian “errant” nation getting the “Failed” tag. Forget Iran. It was being hounded once upon a time but now it is showing promise of becoming a good boy in the global class room. [caption id=“attachment_2319228” align=“alignleft” width=“380”] Reuters image[/caption] The world’s first “failed state” may be Greece. This European country, and the cradle of the world’s democracy, is in the dog house not because of its financial/economic poverty (which is of course the obvious reason of its problems) but because it does not boast of a network of powerful friends like Pakistan and North Korea do; and does not have the political and economic heft that Iran possesses. The recent economic and political track record of Greece suggests that it is not a question of ‘if’ but ‘when’ it becomes a failed state – for financial reasons. It is only a matter of time that Greece is going to default on its large public debt and exit from the Eurozone within the next twelve months. The biggest implication of the Greek default is for the world’s sole superpower, the United States, as it would significantly weaken the euro against the dollar, that would inevitably impact the US trade balance and hurt the American economy. It would have a spillover impact on the IMF which has pumped in $24 billion into the Greek economy over the past years to keep it afloat. This will directly impact American taxpayers. Of course, it would dent the image and credibility of the IMF as the Bretton Woods body has pulled all stops to ensure that Greece stays afloat and remains in the Eurozone. Greece has been in free fall as a nation state over the past six years, and bailouts by the international community have had little or no impact. Its GDP has shrunk by 25 percent, unemployment has swelled to 25 percent and youth unemployment has soared to 50 percent.Its public debt to GDP ratio has gone up to an alarming 180 percent. A potential fear is that “Grexit” from the Euro Zone may be a contagion which can spread to other ailing and vulnerable economies like Italy, Portugal and Spain and thus trigger a chain reaction roiling global financial and investor markets. This murky economic scenario brings us to the strategic side of the whole episode. Russia, humiliated and hunted by the West, is waiting in the wings. If Greece were to exit the Eurozone, it may well be exiting from the Western sphere of influence and embrace the Russian bloc. This is the biggest worry for the US-led western community. Those who are still in doubt about such a scenario, here is a reality check for them. Syria, a country very close to Russia (and also China), is already in talks with the country for the construction of a Russian gas pipeline through Greece. But there’s a flip side too. The Greek economy is too small to cause a global spiral of economic doom. The share of the Greek economy in the Eurozone is just about 1.8 percent and only 19 countries are using the euro. The Greek economic contagion may not spread far considering that Europe has a better institutionalized system known as the European Stability Mechanism with a war chest of 500 billion euros (about $560 billion) to help vulnerable European economies. In any case, India cannot be immune to developments in the ongoing Greece crisis. The Greece fallout has already started to have a visible impact on its stock markets on Monday. This is going to be a protracted affair. But what is of greater significance is that the Greece story is going to have a larger strategic impact with Russia already sensing blood. With Russia in the ring, China too will not be far. The writer is a Consulting Editor with Firstpost  and a strategic analyst who tweets @Kishkindha.